Fed Cuts Rate in Global Coordination

The Federal Reserve announced Wednesday a cut of 50 basis points to its federal funds rate – the rate banks charge each other to lend funds – bringing the rate down to 1.5 percent. Stocks reeled at the announcement, spiking and then recoiling as investors tried to anticipate what the rate cut would do to the economy. The Dow Jones Industrial Average (INDU) rose more than 150 points before dropping 62 points to 9,476 at the time this story was updated. The Fed’s cut was part of a global move coordinated by central banks including Bank of Canada, Bank of England, European Central Bank, Bank of Sweden and Swiss National Bank in hopes of stimulating bank-to-bank lending and “easing global monetary conditions.” The European Central Bank cut its key rate 50 basis points to 3.75 percent from 4.25 percent and the Bank of England cut its benchmark rate 50 basis points to 4.5 percent from 5 percent. The Fed also cut the discount rate – the rate it charges banks to withdraw Fed funds – 50 basis points to 1.75 percent. Combined, these cuts will reduce the financial burden on banks and should stimulate increased lending within banks and – ultimately – lending to businesses and individuals. The announcement came less than a day after Fed chairman Ben Bernanke delivered his speech on the economic downturn to the National Association for Business Economics in Washington. Bernanke said the downturn may reach deeper and last longer than he had expected. “The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth,” Bernanke said. Read his full comments here>> The policy rate cut for benchmark Fed funds is geared to stimulate what Bernanke called “subdued” economic growth. Bernanke also said Tuesday that the Fed will use “all the tools at its disposal” to help stabilize the troubled economy. Both Bernanke and Treasury Secretary Henry Paulson, along with President George W. Bush, have spurred recent efforts to stabilize the economy, culminating in Friday’s passage of the Emergency Economic Stabilization Act of 2008. Bernanke spoke in Washington just hours after the Fed announced Tuesday morning its plans to buy up companies’ short-term debt through the new Commercial Paper Funding Facility (CPFF). “We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased,” Bernanke said. “This is not the situation we face today.” Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade. Editor’s note: To contact the reporter on this story, email [email protected].